AVENG LIMITED - Strategic action plan execution and trading statement

Strategic action plan execution and trading statement
AVENG LIMITED
(Incorporated in the Republic of South Africa)
(Registration number: 1944/018119/06)
ISIN: ZAE000111829
SHARE CODE: AEG
JSE 2019 Convertible Bond Code: AEGCB
JSE 2019 Convertible Bond ISIN: ZAE000194940
("Aveng", "the Company" or “the Group”)
STRATEGIC ACTION PLAN EXECUTION AND TRADING STATEMENT
Salient features
- Good progress with the implementation of the strategic action plan
- Rights offer of R493 million completed
- Convertible bondholders support for early redemption and equitization
- McConnell Dowell performance continues to improve
- Progress in addressing and closing underperforming contracts
- Non-core assets classified as Held For Sale and fair valued
- Significant interest in non-core assets with early progress on disposals
INTRODUCTION
Aveng announced its strategic action plan in February 2018 following the completion of a thorough
strategic review, which was undertaken with the assistance of an independent advisor. The aim of the
strategic action plan was to create a robust and sustainable group. Following the announcement, the
implementation of the strategic action plan has focused on:
- Ensuring a long term sustainable capital structure for the Group
- Creating liquidity through the sale of non-core businesses and assets; and
- Increased focus on our core businesses.
ENSURING A LONG TERM SUSTAINABLE CAPITAL STRUCTURE
An essential aspect of the strategic action plan is to finalise a set of capital markets transactions to
ensure a long term sustainable capital structure for the Group. This includes raising new capital and
settling the existing convertible bonds before their July 2019 maturity date.
Aveng are well advanced in agreeing the terms of a revised common terms agreement with its South
African lending banks. Through this process, Aveng was able to negotiate renewed facilities, obtain
additional funding to improve its liquidity position and extend the funding term. These renegotiated
terms will remove some of the immediate pressure on liquidity and provide certainty as to the
availability of ongoing banking facilities. The Company expects to finalise the terms of the revised
common terms agreement prior to the release of its year end results.
At the end of June 2018, the Company completed a successful rights offer, raising gross proceeds of
R493 million of new capital from shareholders. The quantum achieved was at the higher end of
expectations reflecting stakeholder support for the strategic action plan.
In order to address the convertible bonds maturing in July 2019, the Company has announced on 29
August 2018 the terms of an early bond redemption. In terms of the early bond redemption Aveng
have agreed to: i) capitalise approximately R96 million of interest costs under the existing convertible
bonds; ii) repurchase R657 million of its existing convertible bonds at a price of 70% of par, funded
through the issue of a new debt instrument of R460 million; and iii) settle the remaining R1 403 million
bonds at par through the issuance of new Aveng shares at a price of R0.10 per share. The early bond
redemption will result in the de-leveraging of the balance sheet of approximately R1.5 billion and a
related reduction in the interest burden. The Company remains firmly of the view that the
implementation of the early bond redemption is in the best interest of all stakeholders. Deleveraging
the Company to reduce its debt burden and improve liquidity is critical to realising value for Aveng
shareholders.
On 30 August 2018, bondholders voted to accept the terms of the early bond redemption as
announced on SENS. On 10 September 2018, shareholders will be requested to vote to pass the
necessary resolutions to give effect to the specific issue of shares to settle the bonds. Continuous
engagement with the largest shareholders indicates that there is support for the proposed transaction.
Improved liquidity management
The Group has commissioned consultants to assist in introducing an improved liquidity management
process in all its South African operations. The process is now fully operational and embedded within
all of the South African businesses. The process has resulted in better management of cash, existing
bank facilities and working capital. A significant improvement in the accuracy of cash flow forecasting
is now evident, facilitating improved control and management of the Company’s overall liquidity
position.
Following stakeholder support, the company’s balance sheet will significantly improve and combined
with improved liquidity allows the Company to complete the execution of the strategic action plan.
CREATING LIQUIDITY THROUGH SALE OF NON-CORE ASSETS AND BUSINESSES
The strategic review identified businesses and other assets that were considered to be non-core.
These included Aveng Trident Steel, Aveng Grinaker-LTA, Aveng Manufacturing and certain
properties and other assets.
Performance of non-core businesses
Significant progress has been made to turn around Aveng Grinaker-LTA following the appointment of
a new leadership team. The loss making Civil Engineering business unit received immediate attention
resulting in leadership changes and a specific focus on operational delivery on underperforming
contracts. Three of the loss-making roads contracts in the Civil Engineering business have been
completed in line with the revised budgets. The remaining two road contracts are achieving cost and
productivity milestones and are performing in line with expectations. Interventions in the Inland
Building business unit are underway to ensure that projects are completed within the expected time
and cost objectives.
Pleasingly, the remainder of the businesses including Mechanical & Electrical, Building Coastal,
Ground Engineering and Aveng Water continue to show positive results, although these are
insufficient to offset the losses incurred in Civil Engineering. Rand Roads results were negatively
impacted post year end following the recognition of a provision for a doubtful debt as a result of a
client entering Business Rescue.
Whilst two of the Aveng Manufacturing business units have performed profitably, other business units
exposed to the mining and rail sectors continue to experience headwinds resulting in an overall
operating loss for the segment. New leadership has developed a focused strategy to address
underperformance, including closing non-performing sites, rationalising production facilities and
reducing operational costs and capacity. In addition, there is a strong focus on driving offshore
revenue opportunities, notably in Aveng DFC. Overall, whilst some business units remain loss
making, the improvement initiatives undertaken are expected to place the segment on a stronger
footing as the disposal process is underway.
Aveng Trident Steel is led by a consistent and stable management team and continues to show
improvements in profitability and will report an operating profit for the year to 30 June 2018. Volumes
have remained largely static, but there has been some improvement in margins. Coupled with strong
cost management, this has led to an overall improvement in the financial performance.
Disposals Process
As announced on 2 August 2018, Aveng has entered into agreements to sell its Van der Bijl Park and
Jet Park properties for a total value of R254 million. The values achieved on these disposals were at
or better than management expectations. These disposals evidence the commencement of the
process to delever the Company and focus on core operations. The disposal of the Jet Park property
remains subject to shareholder approval.
The disposal process for non-core businesses was launched during the period, with significant
interest from credible buyers for the majority of the businesses earmarked for sale. There has been
engagement with potential buyers for all non-core assets, with non-binding offers received for several
and negotiations well advanced on others.
The decision to dispose of non-core assets has resulted in the consideration of impairment and the
reclassification of the assets as held for sale. This requires the realisable value to be assessed under
a different valuation approach, being fair value less costs to sell. This change in measurement criteria
has resulted in adjustments to non-core asset values and related assets such as deferred taxation.
The approximate value of these adjustments will be R2.2 billion. These adjustments will be reflected
in basic earnings and basic earnings per share but are excluded from headline earnings and headline
earnings per share.
Management obtained independent valuations in support of the fair value assessments and remain
confident that it will be able to realise acceptable values for these assets given the interest received
from the market. The achievement of this objective remains one of management’s overriding
priorities. The planned completion of all disposals is by June 2019.
UNLOCKING VALUE FROM CORE BUSINESSES
McConnell Dowell
In June 2017 McConnell Dowell completed a reset of its balance sheet post review of all long-
outstanding uncertified revenue and claims. This allowed the business to embark on a more
customer-centric settlement process aimed at disengagement from various litigation processes
through settling claims. This has yielded good results, with 20 of the 24 identified legacy claims being
settled largely in line with the expected values during the course of the financial year. The remaining
outstanding claims remain a source of future additional liquidity and progress in resolving them
remains on track.
Subsequent to the financial reset, McConnell Dowell has continued to strengthen its senior leadership
team with the addition of experienced industry professionals. The stability and experience of this
executive leadership team is delivering improved project performance and greater consistency of
execution throughout the organisation.
McConnell Dowell has been optimised and is now well-positioned to capitalise on growth
opportunities. The business will report an operating profit for the financial year ended 30 June 2018.
The improved operating performance together with the results of the settlement process on legacy
claims has also resulted in a positive cash flow for the year. Notably, McConnell Dowell has been
operating on a self-sustaining basis since the recapitalisation in September 2017, and this trend is
expected to continue.
McConnell Dowell has successfully completed a number of large contracts during the period and
received several industry awards in the process. The markets serviced by McConnell Dowell offer
significant opportunities but remain intensely competitive. In conjunction with the improved operating
model, McConnell Dowell has undertaken an in-depth review of all markets in which it operates and
has redefined its addressable market to target opportunities that are in line with its acknowledged
areas of specialisation and in which the company has demonstrable history of successful execution.
At 30 June 2018, McConnell Dowell’s two-year order book was AUD 0.8 billion vs AUD1.5 billion in
December 2017. The existing order book is higher quality due to the improved project execution
demonstrated in the current results as well as the elimination of zero contribution legacy contracts. As
such there is a higher level of confidence that the order book will result in McConnell Dowell delivering
the gross margin embedded within the current workload. Winning new work continues to be a key
focus for the business. A key aspect of this strategy is focussing on a number of Early Client
Involvement (ECI) projects. In this type of process, clients engage with a preferred contractor to fully
develop the scope and costs associated with the project. Due to the collaborative nature of this
process, there is a higher likelihood that this will result in contract awards. The approximate value of
work in pursuit by McConnell Dowell through ECI projects is AUD1.3 billion with the likelihood of
converting this into confirmed order book being higher than via traditional tendering methods.
Moolmans
Moolmans continues to enjoy a strong market position as the pre-eminent open-cut mining contractor.
Its track record of operational and financial performance and resilience in a difficult commodity market
has made it more sustainable than other competitors. The mining sector in South Africa continues to
be under significant pressure. Moolmans has underperformed for the year due to a number of
underperforming contracts. A comprehensive, group lead, and structured turnaround intervention is
underway. The immediate focus has been on improving contract performance, renegotiating
contractual terms and, where necessary, exiting contracts. Good progress has been made. Two new
leaders have recently been appointed. The turnaround programme is expected to continnue through
the first half of the current financial year. Moolman’s order book as at 30 June 2018 was R5,3 billion
versus R6,7 billion in December 2017.Similar to McConnell Dowell, Moolmans will be enhancing its
business development focus and processes.
TRADING STATEMENT
In accordance with section 3.4 (b) of the JSE Listings Requirements, shareholders are advised that
the headline loss per share (“HEPS loss”) for the 12 months ended 30 June 2018 will be more than
100% better than the comparative period. The HEPS loss will be between 297 cps and 329 cps,
compared to a reported loss of 1625.3 cps in 2017 (adjusted for the deemed bonus element of the
rights offer, 1196.9 cps in 2017), while the headline loss for the year will be between R1 602 million
and R1 770 million, compared to a loss of R6 449 million in 2017.
The basic loss per share (“EPS loss”) will be more that 100% better than the comparative period. The
EPS loss will be between 607 cps and 671 cps, compared to a reported loss of 1690.6cps in 2017
(adjusted for the deemed bonus element of the rights offer, 1245.0 cps in 2017), with basic loss in
earnings of between R3 272 million and R3 616 million for the year, compared to a loss of R6 708
million in 2017.
4 931 854 395 Shares were taken up during the rights issue. The shares were only issued on 2 July
2018 resulting in an event after the reporting date. Consequently, the issued ordinary shares will only
increase in the 2019 financial year. However, the weighted average number of shares for the review
period and prior corresponding period have been adjusted in accordance with IAS 33, Earnings Per
Share, in order to account for the deemed bonus element inherent in the rights issue as a result of the
Rights Offer being priced at a discount to the market share price.
The Group is currently in the process of completing its financial statements and finalising the year end
audit. The Group will release its results for the financial year ended 30 June 2018 on 25 September
2018.
The financial information contained in this trading statement has not been reviewed nor reported on
by Aveng’s independent external auditors.
JSE Sponsor
UBS South Africa Proprietary Limited
7 September 2018
Jet Park
Michael Canterbury
Group Executive: Strategy & Investor Relations
Tel: 011 779 2979
Email: michael.canterbury@avenggroup.com
Date: 07/09/2018 07:05:00 Produced by the JSE SENS Department. The SENS service is an information dissemination service administered by the JSE Limited ('JSE').
The JSE does not, whether expressly, tacitly or implicitly, represent, warrant or in any way guarantee the truth, accuracy or completeness of
the information published on SENS. The JSE, their officers, employees and agents accept no liability for (or in respect of) any direct,
indirect, incidental or consequential loss or damage of any kind or nature, howsoever arising, from the use of SENS or the use of, or reliance on,
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